Markets have traded benignly in the first few weeks of the year, a stark contrast to twelve months ago when investors feared they were witnessing a slowdown in Chinese growth.
Changes to out tactical outlook
We changed our view on three asset classes over the month, moving cash from positive to neutral, government bonds from negative to neutral and hard currency emerging market sovereign debt from negative to double negative. Yield assets have sold off as markets price in higher growth and inflation and we have therefore used cash to add to positions and bring the portfolio closer to full investment. Having a small amount of firepower in this way allows us to build in downside protection for the fund.
We have been rotating out of hard currency emerging market debt for some time, using ongoing strong performance as an opportunity to take profits. In an economic slowdown, emerging market borrowers will find it harder to repay foreign denominated debt, though we do lessen this risk by investing in an active manager who focuses on sovereign debt, with limited tactical corporate exposure focusing on companies that generate revenues in US dollars.
Source: Fidelity International
Defensive income assets becoming more attractive
Within some of our multi asset income portfolios, we added to US government and investment grade bonds last month. Higher yields meant that we were less penalised for adopting a defensive stance and so we took this opportunity to build in portfolio protection - with our move to a more defensive stance common across all asset groups in the portfolio.
Maintenance work for hybrids
We continue to like hybrid assets and are beginning to express a clear preference for loans over high yield bonds within this space. The European Central Bank decision to trim purchases of investment grade corporate bonds is likely to represent a headwind to higher risk high yield bonds in Europe, as investors find less competition for issuance. Due to their floating rates, European loans are relatively unaffected by central bank actions. We continue to prefer asset classes towards the lower end of the European capital structure - including dividend paying equities.
Over the past few months, we have been rotating from a generic Asian high yield bond strategy to one which has been specifically designed for us. This custom built strategy will represent the underlying manager’s higher conviction views. While it should therefore outperform over the longer term, on a stand-alone basis, it can exhibit more volatility in the short term. Given the diversified exposures of our funds, however, we do not believe that this will affect them at a top level.
Changing opportunity sets in growth assets
While we are maintaining our neutral view on equities, the composition of our exposure is changing. We are beginning to add further to our enhanced income strategy, which should help raise the yield of our income funds. The strategy is also lower beta, meaning it should outperform in the event of a broad market sell-off.
Our Asia Pacific ex-Japan equity strategy performed strongly over the month, erasing all of its losses over the fourth quarter. This provides us with an opportunity to reduce exposure before markets potentially price in higher growth and inflation going forward.
Performance of the Fidelity Multi Asset Income fund over 3yrs
Source: FE Analytics
Reits continue to be our least favoured growth asset, as they are vulnerable to higher interest rates but have not significantly de-rated on the stronger inflationary picture. One possible exception might be Asian Reits, which offer better value. Even here, however, the main attraction would be to further diversify our income sources rather than a representing a high conviction view.
Eugene Philalithis is portfolio manager of the Fidelity Multi Asset Income fund. The views expressed above are his own and should not be taken as investment advice.